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Philippines Central Bank Pauses After a String of Rate Cuts

Philippines Central Bank Pauses After Series of Rate Cuts

The Philippine central bank kept its key interest rate unchanged as it watches how previous easing steps filter their way through an economy mired in its worst crisis in decades.

Bangko Sentral ng Pilipinas left its benchmark rate at 2.25% on Thursday, as 17 of 18 economists in a Bloomberg survey predicted. One forecast a half-point reduction.

The decision was a “prudent pause,” Governor Benjamin Diokno said in a statement, while previous rate cuts are given time “to fully work their way through the economy, even as the national government continues to implement measures to bolster economic activity.”

The Philippines fell into recession last quarter after measures to contain the coronavirus pandemic damped consumption and drove job losses to a record. The government is loosening restrictions to help spur growth with the economy expected to shrink by as much as 6.6% this year.

Philippines Central Bank Pauses After a String of Rate Cuts

Before the rate announcement, the Philippines’ benchmark stock index closed down 0.6%, while the peso weakened 0.2% Thursday to 48.68 against the U.S. dollar, halting five straight days of gains.

Thursday’s decision comes as the Bangko Sentral’s peers in Indonesia and Thailand also kept interest rates on hold this month to give previous easing time to take effect.

Aggressive Easer

The Philippine central bank has been among Asia’s most aggressive in easing policy, cutting the key rate by a total of 175 basis points so far this year, reducing lenders’ reserve requirement ratios and pumping liquidity into the financial system. Diokno recently had signaled that he saw no need to cut rates again anytime soon, and reiterated Thursday that the current settings “remain appropriate.”

“Monetary authorities will likely hold off on further rate cuts in 2020 and look to fiscal stimulus to complement the flurry of moves from the BSP to jumpstart economic growth,” said Nicholas Mapa, senior economist at ING Groep NV in Manila. “Fiscal authorities may need to frontload expenditures to avoid another quarter of double-digit contraction.”

What Bloomberg’s Economists Say

“Given the central bank’s heavy lifting to support the economy, today’s pause was indeed a prudent move. At this juncture, the onus is on the government to accelerate its public health and fiscal response to protect lives, restore confidence and keep households and businesses afloat. Negative real interest rates also limit the scope for further rate cuts. Any further monetary policy support will likely be channeled through non-rate measures.”

Justin Jimenez, Asia Economist

The government must address health concerns and provide fiscal support during these times, BSP Director Dennis Lapid said at Thursday’s live-streamed briefing announcing the rates decision. A virus relief bill worth as much as 165.5 billion pesos ($3.4 billion) is up for final approval in the Philippine legislature.

“Monetary policy cannot push on a string,” Lapid said. “No amount of monetary easing or liquidity injections can push businesses and consumers to spend if confidence is not there.”

The government has not made any formal request to further tap central bank facilities to fund its budget deficit, after borrowing 300 billion pesos ($6.2 billion) in March out of an allowed 540 billion pesos, Deputy Governor Francis Dakila said. The BSP’s accommodative monetary policy stance, coupled with its bond buys in the secondary market, provide the government readily available credit at lower borrowing costs, he said.

Other key points from the statement and briefing:

  • The BSP sees early signs of a recovery in the domestic economy, supported by “ample” liquidity in the financial system
  • The bank stands ready to deploy “all tools” in its arsenal
  • The bank raised its inflation forecast for this year to 2.6% from 2.3% previously, and its 2021 forecast to 3.0% from 2.6%

Bangko Sentral is next scheduled to set the key rate on Oct. 1.

©2020 Bloomberg L.P.